Umbrellas Companies: Pros & Cons

In today’s evolving work landscape, umbrella companies have become a key component for contractors, freelancers, and consultants in various fields.

What is an umbrella company? 

An umbrella company acts as a bridge between you and your clients, offering a blended solution that combines the perks of freelancing with the benefits of employment.

While they undoubtedly make things easier, it’s important to understand the pros and cons of partnering with an umbrella company.

In this article we will delve into what an umbrella company is, why they’re popular within the IT sector, and the benefits they can provide to you and your freelance IT business.

When to use an Umbrella Company as a freelancer?

As mentioned previously, umbrella companies are a great option for self-employed professionals who wish to enjoy flexibility of freelancing while still benefiting from the security of traditional employment.

They become particularly valuable in several scenarios:

Short-term projects: Professionals working on short-term freelance projects may find setting up a limited company too costly and time-consuming. Umbrella companies provide an easy, hassle-free alternative by handling all administrative tasks, taxation, and payroll on your behalf.

New freelancers: If you’re just starting out in the world of IT freelancing, the long list of admin tasks can feel a little overwhelming. Umbrella companies make this transition smoother by managing tax deductions, invoicing, and payments.

IT contractors: If you’re an IT contractor working under an umbrella company you are entitled to employment benefits that are typically unavailable to the self-employed. This includes sick pay, maternity/paternity leave, and holiday pay.

Regulatory compliance: In areas with complex rules for freelance and contract work, like IR35 in the UK, umbrella companies ensure compliance and reduce the legal burden on you.

By taking care of some of the complexities involved in freelancing, umbrella companies allow you to stay focused on your projects and your business growth.

The most common IT professions for an Umbrella Company

 The IT sector, known for its project-based assignments  and high demand for specialised skills, makes extensive use of umbrella companies. 

Common freelance IT professions that benefit from umbrella companies include:

• Software Developers: From building custom applications to creating systems software, developers often juggle multiple projects or short-term contracts.
• IT Consultants: Professionals who advise businesses on how to use IT to meet their objectives or overcome problems.
• Cybersecurity Specialists: Given the project-based nature of cybersecurity work, specialists in this area frequently operate as IT contractors.
• Data Analysts and Scientists: With the rise of big data, these self-employed professionals often work on specific projects for a limited time, making umbrella companies an attractive option.
• Network Engineers: Responsible for setting up, developing, and maintaining computer networks, network engineers often work on a contract basis for various clients.

Other crucial IT roles benefiting from umbrella companies include Project Managers, System Administrators, UI/UX Designers, Cloud Computing Specialists, and DevOps Engineers.

Advantages of an Umbrella Company

Smooth administrative processes

One of the biggest perks of partnering with an umbrella company is the delegation of time-consuming admin tasks and complex paperwork.

For many IT contractors or freelancers, the idea of managing a limited company is daunting. It entails convoluted financial legislation, regular account filings, and tax management.

An umbrella company simplifies this by handling all necessary paperwork and compliance, allowing you to get to work sooner in your freelance IT career. They manage tax calculations and deductions, ensuring full compliance with tax laws.

Additionally, umbrella companies handle client invoicing and payments – deducting their fee and necessary taxes – before paying out your net income. 

This not only takes HMRC and self-assessment tax returns off your plate, but also lets you focus on your freelance projects without the hassle of managing invoices or chasing payments.

Compliance and legal protection

Compliance and legal protection are crucial for IT contractors, especially in regions with complex legislation like the UK’s IR35.

Umbrella companies provide a solution for compliance by directly employing freelancers, ensuring all work adheres to IR35 – avoiding potential tax penalties and liabilities.

Additionally, IT contractors enjoy employee-style benefits such as sick pay, maternity/paternity leave, and protection against unfair dismissal – rights that are often absent in traditional self-employment.

Immediate market access

For IT freelancers eager to jumpstart your career, umbrella companies are a solid solution.

Firstly, joining an umbrella company is quick, easy, and often completed within a day. Unlike

setting up a limited company, which can be time-consuming and requires upfront

costs, an umbrella company lets you start accepting freelance contracts almost immediately.

What’s more, many agencies and clients prefer working with IT contractors through umbrella companies due to the streamlined process and reduced legal risks. This can lead to more job opportunities and freelance projects for you.

Flexibility and Simplicity

Lastly, the flexibility and ease of partnering with an umbrella company is unmatched:

• IT freelancers can take on multiple contracts with different clients without the hassle of juggling multiple sets of accounts and tax arrangements. The umbrella company takes care of all HR functions too, offering a support layer that freelancers usually don’t have.
• This includes contract negotiations, resolving disputes, and providing advice on day-to-day employment matters.
• For those making the leap from traditional employment to IT freelancing or contracting, (or even vice versa), umbrella companies offer a straightforward solution.

They minimise administrative changes within your records and maintain your employment continuity – setting you up well for future financial or mortgage applications.

Disadvantages of an Umbrella Company

While umbrella companies offer numerous advantages, there are also some drawbacks to consider. These can impact the decision-making process for contractors and freelancers, especially those who value autonomy and the potential for higher earnings. 

Understanding these disadvantages  is essential for making an informed choice.

A lack of personal approach

Umbrella companies typically manage a large number of contractors and freelancers, which can sometimes result in a lack of personalised support. 

You C might find  your unique concerns or questions are not addressed as thoroughly as they would be with a dedicated accountant or in a traditional employment setting.

Due to the volume of individuals under their management, getting timely responses or specific advice tailored to one’s personal situation can be challenging. 

This can be particularly problematic for IT freelancers facing complex tax situations or those new to contracting who may require more guidance.

Not easy to know high-quality vs low quality umbrella companies

The market is flooded with umbrella companies, varying significantly in terms of service quality and the value they add. This saturation makes it challenging for IT contractors to identify and select a reputable provider that aligns with their needs and values.

Some umbrella companies may offer low fees but provide minimal support or hidden charges, while others might charge more but offer comprehensive services and benefits. Determining the best fit for you in your freelance career requires thorough research and sometimes, trial and error.

A cap on benefits

Although umbrella companies offer some employment benefits, these are limited when compared to full-time employment perks. For instance, pension contributions, health insurance, and other benefits might not be as competitive.

The nature of contract work means that some benefits, like job security and long-term financial planning (e.g., mortgages or loans), can be more challenging to secure due to the perceived instability of self-employed  income.

Loneliness

Working as a freelancer through an umbrella company can sometimes make you feel isolated or disconnected from a larger organisation or team. This lack of belonging can affect your job satisfaction and morale, especially if you value being part of a company culture or community. 

Additionally, the short-term nature of contract work might limit your chances for professional development and networking, which are more common in permanent positions within organisations.

Limited scope to work overseas

Umbrella companies typically operate within specific legal and tax jurisdictions, which can limit opportunities for IT contractors and freelancers  to work internationally. Navigating different countries’ tax laws and employment regulations can be complex and may require  working with multiple umbrella companies or finding alternative solutions yourself.

For those seeking to work across borders, the compliance and tax implications can become significantly more complicated. The umbrella company’s ability to manage international tax affairs efficiently and legally can vary, potentially leading to unforeseen tax liabilities or compliance issues.

Managing Companies : the alternative to an Umbrella Company

​​Working with an umbrella company can simplify a freelancer’s life, but sometimes it falls short of offering a sense of community or growth opportunities.

This is where managing companies, like Hightekers, come in as a premium alternative. We address the drawbacks of traditional umbrella companies while providing a more personalised service for IT contractors and freelancers.

Here’s why managing companies could be a better choice for you:

Tailored support

Unlike the often impersonal service of traditional umbrella companies,  a managing company provides personalised follow-up and support. 

Our network of IT freelancers are each assigned a dedicated coordinator, ensuring that individual needs, questions, and concerns are addressed promptly and effectively.

Global mobility and compliance

One of the key advantages of a managing company is our ability to facilitate seamless international mobility for contractors.

Unlike umbrella companies, which may be constrained by jurisdictional boundaries, managing companies like Hightekers provide comprehensive support for IT freelancers who wish to work remotely from another country.

This includes navigating complex tax laws, securing necessary work permits, and ensuring compliance with local employment regulations. As a result, you can access a broader range of global projects without the administrative burdens, vastly expanding your freelance career opportunities and horizons.

Access to a network of experts and opportunities

Hightekers and similar managing companies set themselves apart with a strong network of experts and opportunities.

Our growing network of IT freelancers and tech pros does more than just connect people; it encourages knowledge sharing and helps with career growth.

Independent IT consultants gain access to valuable learning experiences and professional development, leading to better job prospects. Working within such an ecosystem promotes growth, learning, and collaboration, making a big difference in career advancement and the success of freelance projects.

Cloud-based platforms for activity tracking

Managing companies use advanced technology to make freelancer’s lives easier. We offer cloud-based platforms where you can monitor your activities, finances, and project statuses instantly. 

This tech feature brings more transparency and efficiency to your work, giving you better control over your freelance IT projects, compared to some of the more traditional methods used by umbrella companies.

Negotiation support and team spirit

A managing company goes beyond administrative support by offering negotiation advice and fostering a sense of team spirit among its network of freelancers . This includes assistance with contract negotiations to ensure fair terms and rates., 

We also create initiatives that build a sense of belonging and teamwork. This supportive environment boosts job satisfaction and fosters a strong, vibrant network of professionals.

Continuous learning and professional development

Managing companies like Hightekers understand how fast technology changes, so we focus on continuous learning and professional development. We offer training programmes and specialised courses to help IT freelancers keep up with industry trends, improve your skills, and become more marketable.

Conclusion

While umbrella companies serve as a useful entry point for many contractors, the evolving needs of IT professionals and freelancers demand a more sophisticated solution. 

Managing companies like Hightekers offer a premium alternative, providing bespoke services, international mobility, dedicated support, and a community of IT expertise. This approach not only addresses the limitations of traditional umbrella models but also aligns with the aspirations and requirements of today’s freelance tech professionals.

For further reading and to understand the regulatory framework that supports the contracting industry, government websites and data repositories offer a wealth of information. For instance, the UK’s Companies House and the IRS in the United States provide guidelines on contracting and freelancing, including compliance and taxation.

By choosing a managing company, IT contractors and freelancers can navigate their careers with greater confidence, support, and opportunity, setting a new standard in the contracting ecosystem.

Discover the benefits of partnering with a management company